Final Recommendations Issued On UK Libor Rate Fixing

by Robin Pilgrim, LawAndTax-News.com, London

02 October 2012

Following the concerns raised about false submissions of bank quotations to
form the London interbank offered rate (LIBOR), the independent review set up
by the Chancellor of the Exchequer to investigate its regulation published its
final report on September 28, 2012.

Chaired by Martin Wheatley, currently managing director of the Financial Services
Authority, but also the CEO-designate of the Financial Conduct Authority that
will be established next year, ‘The Wheatley Review of LIBOR’ includes
a plan for the comprehensive reform of LIBOR.

It is pointed out that recent revelations have demonstrated that the current
system of LIBOR is broken and needs a complete overhaul. The concern is that
banks have provided estimates of the interest rate at which they would accept
offers of funding, both for LIBOR (and for the Euro interbank offered rate),
which were different from the rate they would have accepted in practice.

Such benchmarks are used as references for the pricing of many financial instruments
such as interest rate swaps and consumer contracts such as mortgages, loans
and credit cards. LIBOR and other similar indexes play a key role in the management
of risk in the economy, as inter-bank rates influence borrowing costs for many
people and companies, being utilized to price some USD550 trillion in loans,
securities and derivatives.

It is considered clear that wholesale reform is required to restore credibility
in LIBOR as a benchmark, and Wheatley has said that his review “sets
out my plans for reforming what has become a broken system and to help restore
the trust that has been lost. LIBOR needs to get back to doing what it is supposed
to do, rather than what unscrupulous traders and individuals in banks wanted
it to do.”

However, he has concluded that LIBOR can be "rehabilitated" through a
comprehensive and far-reaching programme of reform. "Although the current system
is broken, it is not beyond repair, and it is up to regulators and market participants
to work together towards a lasting and sustainable solution.”

The Review sets out a 10-point plan for reform, which includes: new and robust
regulation; a fundamental overhaul of the way LIBOR is run, including taking
responsibility away from the British Bankers Association (BBA); a requirement
for banks to back up their submissions with evidence of relevant transactions;
and detailed technical changes to refine the way LIBOR is put together, to make
it much harder to manipulate.

The Financial Secretary to the Treasury, Greg Clark, added that the “independent
report is very clear – the self-regulation of LIBOR has failed. LIBOR
is a hugely important international benchmark and this report makes a series
of comprehensive and practical recommendations designed to restore its credibility.”

The UK government is now examining the Review’s recommendations in detail,
including the costs and benefits of what has been proposed, and the design and
implementation options. It is its intention to introduce any necessary
legislation in the Financial Services Bill that is currently under parliamentary
consideration.

In particular, however, the government is likely to accept Wheatley’s
recommendation that the BBA should transfer responsibility for LIBOR to a new
administrator, who will be responsible for compiling and distributing the rate,
as well as providing credible internal governance and oversight.

As the BBA acts as the lobby organization for
the same submitting banks that they nominally oversee, the report notes that there is a conflict of
interest that precludes strong and credible governance and “helped to
create the opportunity for misconduct, which in turn discredited LIBOR”.

In response to the Review’s comments, the BBA has strongly stated the need for greater regulatory oversight
of LIBOR, and tougher sanctions for those who try to manipulate it. The BBA
Council has indicated it would support any recommendation that responsibility
for LIBOR should be passed to a new sponsor.

Immediate improvements to LIBOR recommended by Wheatley include that the BBA
“should cease the compilation and publication of LIBOR for those currencies
and tenors for which there is insufficient trade data to corroborate submissions...(and) publish individual LIBOR submissions after three months to reduce
the potential for submitters to attempt manipulation, and to reduce any potential
interpretation of submissions as a signal of creditworthiness.”

Global Incorporation Guide (GIG)

An intuitive international business, tax and investment smart tool that searches and compares global jurisdictions for the most effective corporate vehicles and structures based on intended use and ownership preferences.

IMPORTANT NOTICE: Wolters Kluwer TAA
Limited has taken reasonable care in sourcing and presenting the information
contained on this site, but accepts no responsibility for any financial
or other loss or damage that may result from its use. In particular, users
of the site are advised to take appropriate professional advice before
committing themselves to involvement in offshore jurisdictions, offshore
trusts or offshore investments.